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Author: Zhu Yu, Jin Shi Data
This week’s Federal Reserve policy meeting is expected to be the most contentious in years.It is more like a stress test for financial markets to see what direction the U.S. monetary policy debate will take in 2026.
Heading into the meeting, markets were almost certain the Fed would cut interest rates, even as the policy-setting Federal Open Market Committee (FOMC) was at its most divided in years.
With little data to analyze during a record 43-day U.S. government shutdown, conflicting signals from Fed officials and continued pressure from the Trump administration to cut interest rates, the weeks leading up to the meeting have weighed on investors.
Over the past three weeks, market expectations for the Federal Reserve to cut its benchmark overnight interest rate by 25 basis points to a range of 3.50%-3.75% have climbed from 30% to 87%, mainly driven by New York Fed President Williams’ recent support for “insurance interest rate cuts.”
Investment banks including Morgan Stanley, JPMorgan Chase and Bank of America responded by revising their forecasts for a rate cut at the December 9-10 meeting.
However, analysts expect thatOf the 12 FOMC voting committee members, as many as five will hold different views,This further strengthens the view in the market that the Fed is becoming increasingly political.
The policy committee has not had three or more dissenting votes in a single meeting since 2019, and this has only happened nine times since 1990.Analysts now expect this divisive situation to continue.
Sally Greig, global head of bonds at Scottish long-term investment manager Baillie Gifford, said: “The more disagreements you see and the more public they are, the more it calls into question the extent to which the Fed is willing to become more political..This raises the question: How much does the Fed tend to prefer doves to hawks in exchange for its own tranquility?How deep is their fear of losing their jobs?“
Trump’s nominees to the Fed’s seven-member Board of Governors have been leaning dovish.His economic adviser Kevin Hassett, the front-runner to succeed Fed Chairman Jerome Powell next year, has called for lower interest rates.Another Trump economic adviser, Stephen Miran, who just filled the vacancy on the Board of Governors in September, has been pushing for deeper interest rate cuts.
However, other FOMC members, including Kansas City Fed President Schmid, St. Louis Fed President Mussallem, and Fed Vice Chairman Thomas Jefferson, have also been outspoken in expressing their preference to keep interest rates unchanged.
Williams is usually seen as a more neutral official, but in the weeks after Powell said in October that a rate cut in December was “far from a certainty,” Williams took an unequivocally dovish tone on a December rate cut, making more investors nervous about political pressure.
Watch for Powell’s successor
Standard Chartered Bank analysts Steve Englander and John Davies wrote this week that even if the Fed cuts interest rates this week and signals that it will remain on hold in January next year, “given its stance has taken a 180-degree turn from the ‘hawkish’ signal released in the October meeting and minutes,The market may not take this hint seriously.“
Traders pointed to rising volatility reflected in the pricing of short-term interest rate options and a steepening of the longer-term yield curve as signs of such concerns.
“The market is more sensitive now and people have to decide who to listen to,” said a bond trader in London.
However, interest rate futures market data shows thatThe market currently expects the Fed to cut interest rates by only about 75 basis points by the end of next year.
Fabio Bassi, head of cross-asset strategy at J.P. Morgan, said investors should not just focus on the December meeting, “The Federal Reserve, currently headed by Powell, is not inclined to take very radical actions. They implement “insurance” interest rate cuts.“
However, Trump appears determined to lower borrowing costs before the U.S. midterm elections late next year.The Republican president, who has repeatedly expressed dissatisfaction with Powell’s leadership of the Fed, said support for immediate interest rate cuts would be a requirement in his selection to head the central bank, according to an interview published by Politico on Tuesday.
The Fed has announced interest rate cuts at its September and October meetings.
Trump’s attempts to fire Fed governor Lisa Cook, who was appointed by former President Joe Biden, and Treasury Secretary Bessent’s recent comments about possible changes to the way the Fed appoints regional Fed presidents have heightened concerns about the politicization of the Fed.
But the extent to which this political pressure will affect the Fed is unclear.
James Athey, fixed income fund manager at London-based Marlborough Investment Group, said: “I understand why people are talking about this, but given what is known so far,I don’t think it’s reasonable to price it into the market right now.I think this is a risk, not a given.”
Tim Winstone, head of investment grade credit at Janus Henderson Investors, said some clients are rethinking their options when it comes to allocating incremental funds.and reduced investment in the United States, “This shows that people realize that the credibility of what the United States has historically represented is facing higher risks. The evolving political landscape and its impact on the Federal Reserve is undoubtedly one of the considerations.”
